Background of Billabong International Limited
Billabong International Limited is an outdoor clothing retailer in relation to surf clothing, which has been established in Gold Coast, Australia in 1973. The focus of the organisation is on the youth culture and it is dominated by causal lifestyle and the board sports (Billabong.com, 2019). After the completion of the shareholding system, the organisation has been listed in ASX on 11th August 2000. Moreover, it has sponsored 500 global athletes for promoting the development related to board sports, gaining the surf market leadership and building brand reputation. From 2000, the organisation has started diversification to the global market along with acquiring other brands like Tiger Rose. The turnover of the organisation before 2011 has been soaring and it experienced more growth rate in the industry compared to its competitors. However, there has been decline in profit margin of the organisation since 2012.
For analysing the financial condition of Billabong International Limited in 2017, the financial information of the last year is taken into consideration and the following aspects are considered:
In order to evaluate the profitability position of Billabong International Limited, the profitability ratios that are taken into consideration include gross margin, net margin and return on capital employed (Refer to Appendices, Appendix 1).
Gross margin is the percentage of sales revenue remaining after making the expense of inventories available to the customers is taken into consideration (Adam, 2014). It has been identified that the gross margin of the organisation has increased from 50.46% in 2016 to 51.17% in 2017. This is because the cost of sales has fallen considerably by 10.26%, which has assisted in offsetting the decline in revenue by 8.97% in 2017. Moreover, despite the decline in gross profit, it has managed to maintain its gross margin and this implies that the sales fluctuations did not have big impact. By taking into consideration this situation, the competitive position of the organisation in terms of gross margin has improved in 2017.
In the words of Almamy, Aston and Ngwa (2016), net margin represents the ability of an organisation towards the enforcement of cost control measures by taking into account that net margin is prepared after consideration of overhead expenses related to administrative expenses, logistics and distribution expenses as well as past selling services. The increase in negative net margin from -2.20% in 2016 to -7.87% in 2017 denotes that Billabong has failed to implement cost cutting measures due to which the portion of profit remaining after interest and overhead payments has fallen in accomplishing favourable returns. Moreover, increased impairment expenses have been another reason behind the declining net margin of the organisation.
Profitability Analysis
Finally, with the help of return on capital employed, it is possible to determine the performance of assets while taking into account long-term financing, which would help in evaluating the longevity of an organisation (Banerjee, 2015). In this case, significant decline could be observed in the ratio from 2.72% in 2016 to -20.61% in 2017, as it implies that Billabong has failed to generate more returns from each dollar of employed capital.
Based on the above discussion, it could be said that the profitability position of Billabong is not satisfactory due to falling profit level and inability to generate sufficient return on investments.
For analysing the efficiency position of Billabong International Limited, the efficiency ratios that are taken into consideration include inventory turnover period, receivables turnover period and payables turnover period (Refer to Appendices, Appendix 2).
Inventory turnover period helps in gauging the efficiency of an organisation in controlling its merchandise and thus, it is significant to generate higher return. If the inventory turnover period is high, it showcases the inability of the organisation in clearing its obsolete stocks (Baños-Caballero, García-Teruel & Martínez-Solano, 2014). In this case, the inventory turnover period has increased from 126 days in 2016 to 132 days in 2017, which is due to the falling demand of the products of Billabong, as evident from its sales revenue.
As commented by Barr and McClellan (2018), receivables turnover period showcases the amount of time required for recovering the amounts outstanding from the debtors of an organisation. In case of Billabong, the ratio has increased from 56 days in 2016 to 60 days in 2017 due to the lenient debtor policy adopted by the organisation. This implies the inability of Billabong to mitigate risks pertaining to deficiency of capital in collecting dues effectively (Churet & Eccles, 2014).
Payables turnover period signifies the time taken by any organisation in settling its payments with the creditors and suppliers. For Billabong, fall in payables turnover period could be observed from 83 days in 2016 to 78 days in 2017. This is because the suppliers are unwilling to extend their payment terms with the organisation owing to the loss incurred and fall in market demand. This necessitates Billabong to settle its supplier and creditor payments at the earlier period.
From the above analysis, it is evident that the efficiency position of Billabong International Limited is not satisfactory in the global market because of fall in demand and loss of trust of the suppliers and creditors.
Efficiency Analysis
For assessing the liquidity position of Billabong International Limited, the liquidity ratios that are taken into consideration include current ratio and quick ratio (Refer to Appendices, Appendix 3).
Current ratio denotes the capability of an organisation in repaying its short-term obligation with the short-term asset base available (Dahmen & Rodríguez, 2014). A current ratio of 2 is deemed to be ideal for any business organisation. For Billabong International Limited, the ratio has increased from 2.29 in 2016 to 2.42 in 2017. This is because of the increase in the amount of obsolete inventory over the year and as a result, the organisation has ample amount of idle working capital that could not be used for improving the other business operations. However, Billabong possesses the ability of repaying its payments with the suppliers and creditors, even if the period is minimised.
Quick ratio is another measure of liquidity deemed to be superior over current ratio owing to the fact that inventories and prepaid expenses are not considered for evaluation of the liquidity position of an organisation (Enekwe, Agu & Eziedo, 2014). In case of Billabong International Limited, quick ratio is observed to increase slightly from 1.30 in 2016 to 1.38 in 2017, which is higher than the ideal margin of 1. This again denotes the capability of the organisation in settling its suppliers quickly, as it has to maintain adequate cash in hand for meeting the business requirements.
Hence, in terms of liquidity, the position of Billabong is observed to be slightly favourable, as it has sufficient amount of cash in hand for settling its short-term dues and obligations.
In order to analyse the gearing or leverage position of Billabong International Limited, the gearing ratios that are taken into consideration include debt
Debt ratio gauges the total liabilities of an organisation in contrast to its total assets (Bekaert & Hodrick, 2017). It has been identified that the debt ratio of Billabong has increased from 0.66 in 2016 to 0.70 in 2017 and this implies that the organisations funds majority of its assets by obtaining loans from banks and other financial institutions. This is due to the unwillingness of the shareholders in making further investments because of the declining net margin and falling demand of the products of the organisation in the market. Thus, debt ratio indicates that Billabong has to sell 70% of its assets in 2017 to settle all its liabilities compared to 66% of assets in 2016.
Liquidity Analysis
Equity ratio is used for gauging the amount of assets, which are funded by the investments of the owners by contrasting total equity with the total assets of the organisation (Islam, 2014). In this case, the equity ratio of Billabong has fallen from 0.34 in 2016 to 0.30 in 2017 (Annualreports.com, 2019). This implies that the investors own 30% of the business assets of Billabong in 2017 compared to 34% of the assets in 2016, as the organisation has failed to provide sufficient return on investment to the investors.
Debt-to-equity ratio is a measure of solvency that compares the total liabilities of an organisation in contrast to its total equity (Zietlow et al., 2018). This ratio denotes the portion of business financing, which comes from the investors and creditors. If the ratio is high, it indicates that more bank loans are used rather than obtaining funds from the shareholders (Kanapickien? & Grundien?, 2015). In case of Billabong International Limited, considerable rise in debt-to-equity ratio could be observed from 1.93 in 2016 to 2.30 in 2017. This implies that the creditors have more stakes in the business operations of Billabong instead of the shareholders. However, debt-to-equity ratio of above 1 is deemed to be highly risky for both investors and creditors, which is beyond the acceptable limit. Moreover, the financial leverage of the organisation has increased due to increase in debt burden and this has minimised the ability of repaying its debt in 2017.
Interest cover ratio is a leverage ratio gauging the ability of an organisation in making interest payments on debt timely (Li, 2015). The main reason that this ratio is calculated is to gain an insight of the risk position of the organisation. In case of Billabong International Limited, interest cover ratio is observed to fall drastically from 0.40 in 2016 to -2.16 in 2017. However, it is well below the minimum ideal standard of 1 (Petty et al., 2015). The main reason behind the decline in this ratio is that Billabong has suffered operating loss in 2017 due to which it has lost the ability of clearing its interest payments.
Therefore, in terms of gearing or leverage, Billabong International Limited is struggling to maintain its competitive position in the market owing the inability of setting its debt obligations.
In order to conduct the investment analysis of Billabong International Limited, the investment ratios that are taken into consideration include earnings per share, price earnings ratio and return on equity (Refer to Appendices, Appendix 5).
Leverage Analysis
As laid out by Uechi et al., (2015), earnings per share denote the portion of the profit of an organisation assigned to each outstanding share of common stock. For Billabong International Limited, the earnings per share of the organisation have been outstanding in both the years. More precisely, the situation is adverse for the organisation as well as its investors, since earnings per share of the organisation have declined from ($0.12) in 2016 to ($0.39) in 2017. The main reason that the earnings have been negative in both the years is that the organisation has faced net loss, which implies that it is losing money in that period (Wahlen, Baginski & Bradshaw, 2014).
Price earnings ratio is used for company valuation that gauges its current stock price relative to earnings per share. In addition, the ratio is used for identifying whether the organisation could be categorised under red chip or blue chip (Yegon, Cheruiyot & Sang, 2014). In case of Billabong International Limited, price earnings ratio has been negative in both the years, which implies that the organisation is in the declining stage. The main reason behind the negative figures is that the earnings per share of the organisation have been negative in both the years owing to the operational problems. As a result, the developing speed of Billabong International Limited has been minimised in the operating markets of the organisation.
Return on equity ratio is deemed to be crucial for the investors, as it assists in gauging the capability of an organisation in generating profits from the investments of the shareholders in the organisation (Zainudin & Hashim, 2016). In case of Billabong International Limited, the return on equity has been negative as -9.37% in 2016 and the situation has been aggravated further to -44.01% in 2017. The primary reason that return on equity has fallen drastically is due to the fact that earnings before tax of the organisation has been negative in both the years. Moreover, the retained earnings of Billabong have been negative, due to which there has been drop in total equity of the organisation in 2017.
After consideration of all the investment-related aspects, it is clearly evident that Billabong International Limited has not maintained a sound financial position from the perspective of the investors. This is because of negative earnings per share and negative profit margin and hence, the overall return of the shareholders would be maximised.
Conclusion
Conclusion and findings:
After consideration of all the above financial aspects, it is possible to infer that the financial performance of Billabong International Limited is not acceptable in both 2016 and 2017. This is evident from negative net income, increase in liabilities and impairment charges and fall in total equity of the organisation. However, the only exception could be observed in terms of liquidity as the organisation has adequate amount of cash to cover its daily business requirements. Moreover, the past acquisition programs undertaken by Billabong International Limited have negative impact on the profitability of the organisation due to which it has suffered losses in the year 2017.
It is further apparent from the efficiency analysis of Billabong that the debtors are delaying in clearing their dues due to which a large amount of cash is stuck in the form of trade receivables. Due to the decline in net profit or specifically net loss, the creditors are unwilling to extend their credit terms due to which it is not possible for the organisation to retain cash for longer timeframe. Therefore, it could be stated that Billabong International Limited has not maintained sound financial performance and the situation has deteriorated further in 2017 owing to considerable amount of loss.
Billabong International Limited is observed to suffer from a number of financial problems and for overcoming those issues, the following recommendations would prove to be fruitful for the organisation:
- The organisation is required to minimise its operating expenses, especially impairment expenses, as it would assist in increasing the profit margin of the organisation.
- Billabong is required to tighten the debtor policy by collecting quickly from the debtors so that it could increase its availability of working capital for funding daily business needs appropriately.
- The firm is required to minimise its inventory level, since the demand is observed to be declining in the market and such reduction would increase the overall cash base of the organisation.
- The organisation could think of selling a portion of assets for generating cash flows and afterwards, it could devise out innovative strategies for winning back the markets.
- Finally, Billabong is required to minimise its financial leverage by raising more funds from the investors, as it would help in minimising the interest payments and overall liabilities.
References:
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